As Vietnam prepares to meet the demand for increased investment, it needs to reduce its reliance on the state budget and to start preparing for the transition away from concessional donor financing for urban infrastructure services. The necessary transition strategy must involve diversification of financing sources for infrastructure development, focusing on increasing the role of the private sector as a source of finance for infrastructure and as a developer of infrastructure. The strategy must also recognize the increasing role of local governments in promoting infrastructure investments in accordance with government's decentralization policy. The increased participation of the private sector in financing infrastructure in coordination with local governments will support decentralization and improve the efficiency of infrastructure investments. However, the success of this new trend rests very critically upon continued improvements in the corporate governance environment at the local government level.

Key reforms related to the planning and management of infrastructure services can also improve the financing possibilities. The authorization by central government to allow local governments to borrow up to 30% of their annual budget for development investments (100% in the case of HCMC and Hanoi) was a step in the right direction. It will be important for local governments to develop their credit-worthiness by ensuring, to the extent possible, cost-covering tariffs (operation, maintenance and investment costs) for infrastructure services and by developing new sources of revenue. Improved cost recovery will provide infrastructure enterprises with the possibility of self-financing using retained earnings, and open the possibility for alternative financing sources that rely on future revenue streams. The development of new sources of revenue such as a broad based property tax and/or a local income tax would provide further opportunities.

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Urban Development StrategyMeeting the challenges of rapid urbanization and the transition to a market oriented economy
Authors: Alan Coulthart, Nguyen Quang and Henry Sharpe